When people think about estate planning, they usually think about their Will.
But one of the largest assets many Australians own doesn’t automatically follow the instructions in their Will at all—it’s their superannuation.
That’s why one of the most important estate planning decisions is how your super will be paid when you pass away.
Two of the most common strategies are a Binding Death Benefit Nomination (BDBN) and a Reversionary Pension. While they may sound similar, they work quite differently.
What is a Binding Death Benefit Nomination?
A Binding Death Benefit Nomination is a legal direction to your super fund telling the trustee who should receive your super when you die.
Provided the nomination is valid and your chosen beneficiaries are eligible under superannuation law, the trustee must generally follow your instructions.
This can provide certainty and help avoid disputes between family members.
A BDBN also allows greater flexibility. For example, you may direct your super to be paid as a lump sum to your spouse, your children, or your legal personal representative so it forms part of your estate.
What is a Reversionary Pension?
A reversionary pension works differently.
If you’re already receiving a super pension in retirement, you can nominate a beneficiary—most commonly your spouse—to automatically continue receiving that pension after your death.
Instead of the pension stopping and the trustee deciding what happens next, ownership of the pension simply transfers to the nominated person.
This can make the transition much smoother, with continued income payments and less administrative delay during what is often a very difficult time for the family.
What about tax?
This is where the decision becomes much more important.
Many people assume that all super death benefits are tax-free. Unfortunately, that’s not always the case.
While benefits paid to a tax dependant, such as a spouse or financially dependent child, are generally received tax-free, adult independent children may have to pay tax on the taxable component of inherited super.
In some cases, that tax bill can run into tens or even hundreds of thousands of dollars.
The way benefits are paid—whether as a pension or a lump sum—and who ultimately receives them can have a significant impact on the family’s overall tax outcome.
This is why superannuation estate planning should never be considered in isolation from your broader estate plan.
Succession planning matters too
Another consideration is what happens to the surviving spouse.
A reversionary pension can be an excellent option where the primary objective is ensuring your husband or wife continues to receive a regular income with minimal disruption.
However, if your ultimate goal is to ensure wealth eventually passes to your children, or if you have a blended family, a carefully drafted Binding Death Benefit Nomination may provide greater control over where your super ultimately ends up.
In many cases, families don’t choose one strategy over the other—they use both as part of a broader estate planning framework.
There isn’t a one-size-fits-all answer
The “best” strategy depends on your family circumstances, the size of your super balance, whether you’re already drawing a pension, who your intended beneficiaries are and the potential tax consequences.
It’s also worth reviewing these arrangements regularly. Marriage, divorce, the birth of grandchildren or changes in superannuation law can all affect whether your existing nominations are still appropriate.
Your Will, your superannuation and your estate plan should all work together. They all inter-relate which is why at the SWU Group we include this service as part of our advice. When they’re properly coordinated, they can provide certainty for your loved ones, minimise unnecessary tax and ensure your wealth passes to the people you intended.